How to Analyse Biological Assets in Accounting
Definition of Biological Assets in Accounting
When a company has assets that are living, they fall into the category of biological assets. The biological assets in accounting include trees, animals, etc. The accounting will break down and classify every asset, attributing to its value. The biological assets are generally valued at fair value, with less selling costs. Accounting recognizes these biological assets as part of the assets in the statement of the financial position.
Notably, biological assets are often difficult to maintain since they have an active component that makes them grow. They are often under threat of change. They are, therefore, influenced by time since they have a specific growth and development pattern. They also have a limited time window where they sell before they rot or become useless to the consumers.
Characteristics of biological assets in accounting
- Biological assets can grow or procreate hence creating a direct impact on the value of investments.
- The economic value of assets may derive after a very long time. Many of the costs are incurred earlier in the life of the assets.
- The production time is very long hence impacting the way revenue is recognized from the assets.
- Biological assets have no relationship between the expenditure on the asset and the ultimate benefits due to future circumstances such s droughts and floods.
- Biological accounting is used to set out how biological assets that are, for instance, used in agriculture is recorded and presented in a financial statement.
- Biological asset accounting gives a straightforward way of classifying and grouping the living assets to make it possible to recognize the profit and loss of a company.
- Biological assets can degrade and get damaged easily. The value can also depreciate faster hence bringing losses to the company. Their demand is much dependent on seasons. A significant loss might be incurred for instances of climatic changes such as droughts or even floods. Sometimes they are affected by the spread of a disease that damages the biological assets.
Application of Biological Assets in Accounting
To conclude, biological assets are a unique accounting field that will ensure that the living assets are categorized and classified adequately in the company. The accounting field is helpful for the business that majorly deals with biological assets. Classifying an asset as organic will denote its nature and the value for the business owner.